Why Betting On Elections Actually Isn't Such A Terrible Idea


By James Dennin for Kapitall

When former House Majority leader Eric Cantor lost his primary election on Tuesday, June 10th – the stock market slid precipitously the next day. Pundits were quick to point to stock movements as support for the idea that the market is wary about another debt-ceiling debate, should mainstream candidates like Cantor continue to face such strong challenges from the farther-right.

And yet, it’s also important to note that in the same week the S&P hovered near its all-time high, and the situation in Iraq deteriorated rapidly.

Taken together, these two incidents serve as a telling reminder that the market as a whole rarely moves on a single, discrete event. On any given market day, different stocks will move inversely or in tandem with each other, and it is supremely difficult, if not impossible, to find the one factor that has caused a market sea change. That’s what makes “betting” on any one particular catalyst very ill-advised.

That is, unless you’re betting on national elections. Then, surprisingly, the data is remarkably consistent. Between 1942 and 2010, the stock market rallied each and every time that the Nation concluded a mid-term election. The numbers are pretty unambiguous: the average 200-day gain post elections was more than 18%. This means that, historically, the S&P 500 has been one of the most reliably predictable investments one can make – assuming you find the right time to buy the summer before the election.

Of course, past results do not equal future returns. But there are some reasons why this rule has proved so consistent. For one, midterms bring political uncertainty, which the market hates. There’s also a theory that sitting Presidents usually try and squeeze in the “toughest” legislation at the start of their terms, and then use the two years after midterms to ramp up the economy again. That might account for why the pattern has held true for so long.

As far as individual companies go, it’s more difficult to make bold predictions. Different leaders and different parties don’t pursue the same kinds of laws. And for the reasons given above, it’s hard to spot definitive patterns amidst market noise. The top-gaining sector in our study was consumer staples, which gains an average of 3% in the second quarter of midterm years. Conversely, financial and utilities sectors lose an average 4%.

We decided to build a watch-list of some of the largest consumer staples, utilities, and financial stocks to follow throughout the election year. Do you think history will repeat itself? Use the list below to begin your analysis and let us know what you think in the comments!

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Economy , Investing Ideas , US Markets

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